1. The original deal envisaged that LCR would draw
on revenue from Eurostar to service the private debt raised and
to provide a return for its shareholders. LCR's business plan
therefore depended on whether revenue from passengers using the
Eurostar service would meet or exceed forecasts made by the company.
If passenger revenues fell below expectations, the Department
might have to lend more money to LCR to keep it afloat.[1]

2. Estimates of passenger numbers have been progressively
reduced. In bidding for the deal in 1996, LCR forecast that passenger
numbers would reach 21.4 million by 2004 but actual numbers reached
only 7. 3 million (Figure 1). In 2004, passenger numbers
and revenues were revised downwards and the central case numbers
are now below the 1998 and 2001 low case forecasts. The Department
does not, however, expect the impact on the cost/benefit analysis
to be as negative as it might have been because the effect of
lower patronage has been offset by a reduction in LCR's cost of
capital and a reduction in market interest rates.[2]
Figure 1:
Estimates of passenger numbers have been progressively reduced

3. Over optimistic forecasts of Eurostar's passenger
numbers and revenues were produced when the project was first
planned by British Rail and SNCF. Inaccurate forecasts were also
produced ahead of the restructuring of the project in 1998 and,
in 2001 and 2004, by the Department's advisers, Booz Allen Hamilton
Ltd. The Department is nevertheless employing Booz Allen Hamilton
Ltd again to forecast passenger traffic. The Department was unable
to say whether a competition had been held to see if anyone else
could have made more realistic forecasts. Nevertheless, the Department
said it was satisfied that Booz Allen Hamilton Ltd had done the
best professional job it could do at particular points in time.[3]

4. The Department is currently preparing a new forecast
of when LCR may need to draw on the access loan charge arrangements,
as it is likely that Eurostar revenues will be revised downwards.
Although past forecasts have accurately reflected the increase
in revenues following the opening of Section 1 of the Link, what
were not taken into account were potential downside risks such
as the events of September 2001 and the outbreak of foot and mouth
in 2002. The Department and LCR consider that passenger numbers
have not yet recovered from those events. The London bombings
of 2005 added to this list of one off shocks to passenger trends.[4]

5. A further reason for the lower than expected passenger
revenues is the success of the low-cost airlines in competing
with Eurostar on price, and their much larger range of destinations.
These events illustrate the difficulty of accurately forecasting
revenues on novel major projects. The Link is moreover the only
high speed railway in the country and the first new railway line
for a hundred years, so there is no recent national experience
with which to compare it.[5]

6. The Department told us that it has now learned
from all this experience, and that the next time it considered
undertaking a major transport project, it would factor more severe
downside assumptions into its business case analysis.[6]